Trevor Greetham´s Investment Clock October: QE3 boosts risk assets

The Fed announced an open ended quantitative easing program focused on housing finance. Risk assets will probably rally into 2013 as growth picks up and there could be good entry points as markets consolidate their gains.

There is much debate about the transmission mechanism from quantitative easing to the real economy but there is little doubt it is meant to boost risk assets. Stocks and commodities rallied strongly in anticipation of the Fed announcement so a period of consolidation is natural. History suggests we are likely to see a second leg of strong performance and weakness in coming months is most likely a buying opportunity.

We are neutral on risk assets but this stance masks a conflict between strongly supportive technical factors and policy versus a persistently weak trend in macro data. Either the rally in stocks over the summer foreshadows an upturn in the business cycle or current market levels are at risk as doubts over the effectiveness of the Fed’s quantitative easing take hold.

LEAD INDICATORS IN FOCUS

Inflation

• Our global inflation scorecard is pointing downwards.
• However, in recent years the impact of quantitative easing on commodity prices has meant a pick up in growth has gone hand in hand with an immediate increase in inflationary pressures.

Growth

• Stock markets have run ahead of fundamentals with our global growth scorecard still negative.

CURRENT ASSET ALLOCATION POSITIONING

• Although we are underweight equities, we are overweight commodities and REITS, which leaves us with a neutral position on risk assets. This stance masks a conflict between strongly supportive technical factors and policy, versus a persistently weak trend in macro data.
• Either the rally in stocks over the summer foreshadows an upturn in the business cycle or current market levels are at risk as doubts over the effectiveness of the Fed’s quantitative easing take hold.

Trevor Greetham joined Fidelity in January 2006. He is Director of Asset Allocation and in addition to managing funds, Trevor is a member of Fidelity’s Asset Allocation Group. Prior to joining Fidelity, he spent ten years at Merrill Lynch, where he was Director of Asset Allocation. Trevor began his career with UK life insurer Provident Mutual.  He holds an MA in Mathematics from Cambridge University and is a qualified actuary.

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